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Tuesday, July 29, 2014

As
stated in my previous
post,
both Saenuri lawmakers as well as the Ministry of Strategy andFinance
wants to see “adjustments” made to the value of the Won. It's
their way of saying that they want to see the value of the currency
depreciate.

Well,
why does a currency appreciate in the first place? Simply put, it
occurs because the currency is in demand. For example, if a country
exports a lot, the demand for that currency will go up. There are,
of course, other reasons, too, such as increasing (or at least
stable) interest rates, an increase in per capital income, a stable
government, etc.

So,
the value of the Won has been relatively quite high over the past few months.

However,
a few really big things have been happening in the world over the
past few years that are beyond the Korean government's control.
Since 2008, the United States government has injected into its
economy close to US$5
trillionin
stimulus money while keeping interest rates atnearly
zero percentand
having the world's largest debt, which has devalued the Dollar
somewhat. The Japanese government recently decided todepreciate
the Yen.
And
with several European economies having gone belly up over the past
few years (seePIIGS
economies), there have been calls
by several European governments to depreciate the Euro,
and the Euro is expected
to depreciateagainst
the Dollar in the next few months.

Congratulations! You read through that borefest and did't get distracted by porn! Here's your reward! Look at those puppies! LOOK! AT! THEM!Image Source

Everyone
is depreciating (or wants to depreciate) their own currencies. It's
why Saenuri lawmaker Representative Kim Moo-seongsaid,“There
is a Currency War going on in the world right now.”

So
why do governments want to depreciate their own currencies? The main
reason why any government would want to depreciate its own currency
is for the sake of becoming “more competitive.” With one country
after another going through some form of economic contraction or
another, governments are trying to increase exports. And the best
way to increase exports is by making sure to sell at a cheaper price
than other countries. And if you can't make the product cheaper, you
can make the money worth a little less.

(Side
note: If depreciating a currency makes a country more competitive,
shouldn't Zimbabwe be the richest country in the world?)

The
problem with depreciation is that it's like having a shot of whiskey.
Everyone who is calling for their currencies to depreciate are
basically saying, "A shot would really perk me up right now."

Well,
it's true. Having a shot of whiskey will definitely perk people up.
But the problem with having that shot of whiskey, as any whiskey
aficionado will tell you, is that you can never have just one shot of
whiskey... If there is any among you who is thinking that this
analogy does not work because you yourself do not enjoy whiskey, YOU
SHUT UP AND DIE, YOU ABOMINATION!

The
fact of the matter is that we live in an interlinked global economy
and in such an economy, currencies
don't rise or fall in a vacuum. For
example, one complaint that the United States always raises against
China is the latter's monetary policy, which has kept the Chinese
currency, the yuan, artificially low. The Chinese government has
pursued such a policy because it ensured that Chinese goods remain
cheap, which is one of the big reasons for the trade imbalance
between the United States and China. That has provided a steep
incentive for the United States to retaliate by lowering its currency
as well, which in effect, it has done.

Countries
around the world often see currency wars as a zero-sum game. In
reality, it is really a lose-lose game for everyone. For example,
unstable exchange rates candeter
international investment
and slow economic recovery. And of course, currency wars can have
secondary political effects as well. Though this may admittedly be a
case of post
hoc ergo propter hoc,
when was the last time that the American and Chinese governments have
ever seen eye-to-eye on anything?

So
going back to the whiskey analogy, it turns out that people aren't
just slamming down whiskey shots just to perk up a bit. They are
actually in a drinking competition that's being hosted by Delta Tau
Chi (Who got that reference, huh?) and everyone's trying to out-drink
each other. And the drunker they get, the more irritable the
contestants are getting.

Now
it may be an incontestable fact that Jack Daniel's is the best
goddamned drink on this side of the Milky Way Galaxy but it is also
true that spending a bit too much time with him usually gets people
into all manners of trouble.

“But,
John, aren't you by definition saying that as long as people slam
down their shots of sweet, sweet Jack Daniel's nectar in moderation,
it will perk people up and they won't ever have to worry about
getting arrested for indecent exposure in a public park in the
presence of four minors and their very angry mothers and one dad?
Then isn't it also true that depreciating a currency in moderation
can actually work to stimulate an economy, too?”

Well,
firstly that's a terrific question, hypothetical reader who is
actually really me (and no, it is not sad at all that I am having a
conversation with myself).

The
answer to the question as to whether or not depreciating
a currency works to stimulate an economy is this – Yes and no.

Depreciation
works
if prices and wages don't adjust to the new economic conditions. For
example, let's say that you're a citizen of Country A and you make
A$1,000 a month. Now it so happens that your country trades with
Country B. It also so happens that in order to improve economic
conditions, your country's government decides to depreciate your
currency. So, in the past, if your A$1,000 was worth B$1,000, now
your A$1000 is only worth B$500.

In
this new situation, citizens from Country B can afford to buy more of
your things. Now if the prices of your goods and your wages remain
the same, depreciation will absolutely work as those suckers from
Country B (who conveniently aren't depreciating their own currency
for no other reason than to let this hypothetical example work;
ceteris paribus,
bitch!) stops buying their own stuff and continues to buy your stuff!
But it will only work temporarily.

It
will only work temporarily because eventually, inflation always
catches up to depreciation. Let me explain. When the value of your
country's currency is artificially depreciated, other people's demand
for your goods will go up. And one of the laws of supply and demand
is that if demand goes up, so does price.

What
that means specifically for you is that your monthly bills are going
to come out higher than you're used to. And when prices go up and
enough people get upset about it (Hello, labor unions!) it's not long
before wages also go up until it catches up with the price and then
some.

So,
just like slamming down shot after shot after shot of Jack Daniel's,
it's not a matter of whether or not a little currency depreciation
will perk you up. It's a matter of how long you get to have fun
before you wake up the next day with no memory of why you thought it
was a great idea to drunkenly text your ex-girlfriend who has been
happily married for the past three years that you still love her
thirty-eight times while lying next to a one-legged hooker. Not to
mention the massive hangover.

But
that's where democratically elected governments come in. Every
politician wants to get elected and they want to stay elected. So
whenever the hangover is about to set it, they have good news for us
partiers! Just a little hair of the dog and you're good to party
again like it's 1999!

That
hair of the dog usually includes more currency depreciation and more
economic stimulus packages. But as anyone who has ever had a
destructive love affair with Jack Daniel's can tell you, after a
while, even the hair of the dog can't perk you up. You will also
need at least a pack of Marlboro’s (Hello, lowered interest
rates!) and if it's bad enough, Adderall (Hello, quantitative
easing!).

What
you slowly begin to realize, however, is that your body is silently
pleading for you to stop. You need solid food. You need water. And
you need sleep. You need time to recover. You realize that your
stress levels are getting higher, your brain function is slowing
down, and all that booze and drugs is burning a hole in your checking
account, which means that you have to call mom and dad to ask for
more money.

Now
you're in a rut. To reduce your stress levels, you need money so
that you can pay your rent and not get evicted; but to do that, you
need to call mom and dad to ask for more money and explain to them
how you misspent their money (that they had to take out in loans from
Repos-R-Us Bank) on booze and drugs instead of studying in the
library to get that 4.0 GPA that you swore to them that you would get
if they would only just bite the bullet and send you to this
overpriced Ivy League college campus.

Now
you're having second thoughts. Telling them about all those stupid
things you did would disappoint them, break their hearts, make them
lose faith in you, anger them, and hurt them. Worse yet, they might
stop sending you money and force you to move back in to your old
bedroom and get a job at the local paper mill where the highlight of
your day will be watching reruns of “The Bold and the Beautiful”
on your union-approved hour-long lunch break with those other
middle-aged factory lifers who don't like yer kind with all that
mumbo-jumbo book learnin'.

This
sort of thing also happens in economies and there's a name for it –
stagflation.
And it's no fun. If you don't believe me, ask Jimmy
Carter.

Before
you know it, you've become a junkie and have resorted to stealing
(Hello, Taxes
Against Corporate Surplus Profits!).So
what's the real solution? Well, unfortunately, the real solution is
economic as much as it is political. Do you trust the government to
have enough discipline to depreciate the currency only when it is
absolutely necessary, and not do it any time it is expedient? Do you
trust that the stupid college kid really has the willpower to go to
only one Delta Tau Chi-sponsored Drinkathon and then spend the rest
of his time to make sure that he graduates with a summa cum laude?
Or do you think there has to be strong rules and strict morals?

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About Me

My name is John Lee and I am currently the editor and writer behind the independently-run blog, “The Korean Foreigner.”

Recently, I have also begun to work as a freelance copy editor for Freedom Factory. Here, with permission from Freedom Factory, I shall post English translations of Freedom Factory’s weekly newsletter “Freedom Voice.”